Business Ownership Forms: Key Aspects

Forms of Ownership: Key Characteristics

• Formation procedure involves registering some businesses according to South African law, while others don't require a formal process. More procedures increase the cost.
• Legal persona means a business becomes a separate legal entity from its owner upon registration, enabling it to enter contracts and be sued.
• Continuity of existence means the business continues as an entity independent of the owner if registered as a legal persona.
• The owner's liability for debts is tied to legal persona; registration as a separate entity means the business, not the owner, is liable, offering limited liability.
• Tax implications depend on whether the owner or the business is the legal entity; businesses pay income tax (28% in 2014/2015), while owners are taxed in their personal capacity under a progressive tax system.

Income Tax Rates for Individuals (2014/2015 Financial Year)

• 0-174 550 (R): 18% of each R1
• 174 551-272 700 (R): 31 419 + 25% of the amount above 174 550
• 272 701-377 450 (R): 55 957 + 30% of the amount above 272 700
• 377 451-528 000 (R): 87 382 + 35% of the amount above 377 450
• 528 001-673 100 (R): 140 074 + 38% of the amount above 528 000
• 673 101 and above (R): 195 212 + 40% of the amount above 673 100

Management and Control Aspects

• If unregistered as a separate legal persona, the law doesn't specify management; if registered, the law makes demands regarding management personnel.
• Capital requirements are based on the business's size and nature; service-based small businesses need less capital than manufacturing-based large ones.

Sole Trade

• Definition: A business owned and started by ONE person that is not registered as a separate legal entity.
• One person provides all the capital in the business and obtains all the profits in the business.

Sole Trade Characteristics

• Quick, low cost formation procedures.
• The owner is the legal entity and has to enter into a contract in his/her own name.
• The business has no continuity of existence.
• The owner's liability for debts is unlimited.
• Owner profits are taxed in accordance to Taxable Income (R) and Statutory Rates for individuals.
• Owner capital requirements can make a different ownership a better option.
• The owner can make quick decisions and this affords him/her flexibility to capitalize on possible opportunities.

Partnership

• Definition: A business where two or more people become joint owners of the business.
• Usually uses a pretermined ratio to share capital contributions, profits and losses.
• The business is not registered as a legal entity separate from the owners.

Partnership Characteristics

• No legal requirements - quick and low cost.
• The owners are the legal entities and they enter into contracts in their own names.
• The business has no continuity of existence.
• The partners have unlimited liability.
• Owner profits are taxed in accordance to Taxable Income (R) and Statutory Rates for individuals.
• It is possible to raise more capital through a partnership, because there are more people who can contribute capital to the business.
• A good employee may be retained if he/she is offered part ownership in the business.

Partnership agreements

• Partnership agreements defines the terms agreed upon by the partners.
• Partnership agreements may be tacit, verbal or in writing.

Companies: Definition and Purpose

• A legal entity incorporated in terms of Act 71 of 2008, including entities registered under previous Companies Acts, and Close Corporations.
• The goal is to encourage entrepreneurship, promote well-being, simplify registration/management, align shareholder/director rights, and ensure effective non-profit company management with accountability.

Company Types

• State Owned
• Private Company
• Non-profit
• Personal Liability
• Public

Private and Public Companies

• A private company may not be state owned and its Memorandum of Incorporation (MOI) has to specify that no shares will be offered to the public and shares are not freely negotiable or transferable.
• The MOI stipulate different types of shares that will be sold and the associated rights, duties and responsibilities of the shareholders.
• It is described as the duties, responsibilities and liabilities of directors A public company may be listed on the JSE and offer shares to the general public.

Company Name Prescriptions

• Cannot be the same or very similar to an existing business, undesirable, hateful, misleading, nor pretend association with governments.
• Must end with Proprietary Limited (Pty Ltd) for private companies, Limited (Ltd) for public companies, Incorporated (Inc.) for personal liability companies, SOC Ltd for state-owned, and NPC for non-profit companies.

Formation Procedure for registering a company

• A person must pay the required fee and complete a Notice of Incorporation.
• A person must register a Memorandum of Incorporation (MOI).

The Prospectus for a company

• A written invitation to the public to buy shares or other securities in the company.
• A private company will not issue a prospectus as it may not offer shares to the general public.
• It must be noted on the front has been registered

Public Companies have to appoint:

• A company secretary, an internal audit committee, and an external auditor.
• Meeting solvency is ensure through a liquidity test.

Company ownership Characteristics

• It has a complicated cost to register and establish the company.
• It is a suitable form of ownership, regardless of the size of the business.
• Can establish a company as of at least one shareholder.
• A private company up to R4 500 and upwards.
• An owner may choose a sole trader if small, especially to avoid paying higher tax rates than one would for companies.